Cost of Capital and Liquidity Discount
The weighted average cost of capital is interpreted as the opportunity costs of the capital. On the one hand, it describes the time-value of money and, on the other, it provides a standard for measuring the operative and financial risks faced by the target company, strategy or project. In this context, the cost of capital represents the cost of raising both debt and equity.
In many cases a company's shares are not negotiable or their sale and purchase are subject to restrictions. This results in not only a delay between the desired and actual time of sale but also in a difference between the demand rate and the selling rate (greater spread).
Basing itself on financial market methods, OLZ has devised pertinent, objective and market-oriented ways of determining the cost of capital and discounted cash flow. This avoids the pitfalls of subjective additions and deductions for risk and liquidity.
